How will Alibaba move in India? Its ‘Iron Triangle’ strategy is the key

Jayadevan Pk June 29, 2016 3 min

Earlier this month, FactorDaily’s Editor-in-Chief Pankaj Mishra wrote about why he thinks one of the most sensible outcomes in the Indian e-commerce war would be Alibaba acquiring Flipkart, merging it with Paytm and possibly acquiring a logistics player.

I am continuing that thread of conversation here. To understand why this Alibaba-Flipkart-PayTM combine is really how it will play out, it’s important to understand Alibaba’s approach to ecommerce. Jack Ma, the CEO & Co-founder of Alibaba Group, calls this the Iron Triangle.

What is the Iron Triangle?

Alibaba’s iron triangle is a combination of e-commerce, logistics and finance. It all hinges on the massive amounts of commerce data that Alibaba generates. All this data is stored and processed on what is called the Alicloud.

With the help of commerce data — who bought or sold what, when, where, how on Alibaba’s various platforms — the company is able to create a de-risking framework, which in turn is used to underwrite its financial products like loans to small and medium businesses.

Author Duncan Clark, who has closely worked with Jack Ma, explains the iron triangle very well in his book Alibaba, the House that Jack Ma Built. You can look up Clark’s insights into the book, the Chinese ecommerce ecosystem, Alibaba and Ma here.

E-commerce

In e-commerce, the company operates Taobao, Tmall and Juhuasuan. Taobao is a platform where large number of Chinese merchants list their products. Alibaba makes money by providing advertising services to merchants. Tmall is more like a “glitzy” mall, which sells brands like Apple and Zara, Clark writes. And Juhuasuan is a group-buying website. Between the three, the company has over 10 million merchants and one billion distinct items for sale. For perspective, Flipkart has around 100,000 merchants and offers 40 million products.

Logistics

In logistics, Alibaba owns a 48% stake in ‘China Smart Logistics,’ or ‘Cainiao.’ The rest of the company is owned by logistics players that are together called ‘Three Tongs, One Da’. They are Shentong, Yuantong, Zhongtong and Yunda, all from a town called Tonglu close to Alibaba’s headquarters Hangzhou, writes Clark. The scale at which it operates is mind blowing.

[pullquote align=”full” cite=”” link=”” color=”” class=”” size=””]On a normal day, it can service 30 million packages and is expected to handle 100 million packages by 2020.[/pullquote]

India’s Flipkart clocks about 8-10 million packages on a good month. Cainiao is not your typical logistics company. It is essentially a big data platform which links a network of logistics partners, warehouses and consumers. The company recently raised an undisclosed amount of funding at a $7.7 billion valuation.

Finance

The third corner of the triangle is finance. Alipay is like Paypal in the United States. But it claims to be much bigger. Its systems, which run on top of ecommerce data from Alibaba’s ecommerce platforms, can process nearly 85,000 payments every second. On an average day, it processes 180 million transactions. (Paypal does about 13.7 million transactions a day.) Alipay also gives micro-loans to small and medium enterprises based on a system which combines credit ratings with the shopping history of a person. It also operates a money market fund for nearly 281 million customers.

So, the strategic reasons for Alibaba coming together with Flipkart and Paytm are clear. For Alibaba to get commerce data as well as a footing in ecommerce, the easiest way would be to acquire or invest in Flipkart; of course, there needs to be an agreement on valuations and a meeting of minds between the funders and anchor investors on both sides. In logistics, the jury is still out, although they’ve held multiple rounds of talks with Delhivery that are said to have gone cold now. In finance, it already has a significant holding in Paytm, which currently operates the country’s largest digital wallet.

Jayadevan PK travelled to Alibaba headquarters in Hangzhou on a trip sponsored by PayTm, a company in which Alibaba is the largest investor. FactorDaily’s rules on such trips and other factors that guide our journalism can be reviewed in our Code of Conduct.